Ireland’s €200bn debt burden: how did we get here?

Q&A: And how much are the debt servicing costs on such a monster sum?

 The State’s budget deficit ballooned on the back of a collapse in property-related tax revenues, forcing us to borrow heavily just to pay for the same level of State services.

The State’s budget deficit ballooned on the back of a collapse in property-related tax revenues, forcing us to borrow heavily just to pay for the same level of State services.

 

How big is our national debt?

It’s just over €200 billion. On a per capita basis that’s the third highest in the world, eclipsed only by the US and Japan. It equates to €42,000 for every man, woman and child in the State or nearly €90,000 for every worker in the economy.

As a ratio of Government income, a metric that international investors and bond markets keep a close eye on, it stands at 252 per cent. Having such a massive debt leaves the State extremely exposed to another global downturn.

How did we get here?

It originates from financal crisis of 2008. The State’s budget deficit – how much it spends compared to how much it generates in tax – ballooned on the back of a collapse in property-related tax revenues, forcing us to borrow heavily just to pay for the same level of State services. The perilous state of the banks and the Government’s infamous decision to guarantee them also forced us into the arms of an international bailout, which we are still paying off.

So what’s the problem?

The debt servicing costs - the annual interest payment - on such a monster debt are considerable, amounting to billions each year and that’s before you pay down the actual debt itself. In 2014, this amounted to €7.5 billion, which ranks as the biggest annual payment to date. Just think the Government’s upcoming budget day package - the money it expects to have for additional spending and tax measurs - is only likely to be in region of €3 billion.

Is there an upside?

Because we’re living through a period of ultra-low interest rates, Ireland’s debt servicing costs are considerably lower than what they might have been in a different era.

They have fallen significantly in the last few years, giving the exchequer an unexpected windfall. According to the National Treasury Management Agency (NTMA)- the State’s debt management agency - they will be €5 billion this year, falling to to € 4.5 billion in 2020. This represents an annual saving of €3 billion on the peak level seen in 2014.

What else?

The European Central Bank (ECB) was meant to start raising interest rates last year but this has been deferred on account of sluggish economic growth across the EU, meaning our debt servicing costs will remain low for the time being. This has allowed the NTMA put the State’s debt funding on a more even keel, eliminating so-called refinancing debt “chimneys” in 2018, 2019 and 2020 at the best possible time. “ Ireland has taken advantage of the low interest rate environment to issue long-term debt, locking in the benefits of this low-cost borrowing for years to come,” NTMA boss Conor O’Kelly said.

So we’re doing fine?

Not exactly. Having a debt of this magnitude - as noted above - leaves the State seriously exposed to another major downturn. And there is no way of paying down a big debt like this without running continual budget surpluses and keeping a tight rein on spending. This implies trade-offs between spending on badly needed social infrastructure like housing and health and lowering the debt. There is also the unknown factor of Brexit looming around the corner. If it is bad, the Government will have to run a budget deficit to support the domestic economy without paying down debt, meaning we’re likely to remain heavily indebted for decades to come.

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